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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended February 3, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File No. 1-8899
 Claires Stores, Inc.
  Florida
    
    59-0940416(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 3 S.W. 129th Avenue, Pembroke Pines, Florida
    
    33027(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (954) 433-3900
  Title of each class
    
    Name of each exchange on which registeredCommon Stock, $0.05 par value
    
    New York Stock ExchangeRights to Purchase Series A Junior 
Participating Preferred Stock
    
    New York Stock Exchange
  Title of each class
 Class A Common Stock, $0.05 par value
 þ o
 Yes
o No
þ
 þ o
 þ
  þ o o
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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##### 



TABLE OF CONTENTS
 Item
    
    Page No.PART I.
    
    
    3Item 1.Business
    
    
    4Item 1A.Risk Factors
    
    
    9Item 1B.Unresolved Staff Comments
    
    
    15Item 2.Properties
    
    
    16Item 3.Legal Proceedings
    
    
    16Item 4.Submission of Matters to a Vote of Security Holders
    
    
    17PART II
    
    
    17Item 5.Market for Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
    
    
    17Item 6.Selected Financial Data
    
    
    19Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 7A.Quantitative and Qualitative Disclosures About Market Risk
    
    
    32Item 8.Financial Statements and Supplementary Data
    
    
    33Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    61Item 9A.Controls and Procedures
    
    
    61Item 9B.Other Information
    
    
    62PART III.
    
    
    62Item 10.Directors and Executive Officers of the Registrant
    
    
    62Item 11.Executive Compensation
    
    
    62Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    62Item 13.Certain Relationships and Related Transactions
    
    
    62Item 14.Principal Accountant Fees and Services
    
    
    62PART IV.
    
    
    62Item 15.Exhibits, Financial Statement Schedules
    
    
    62Signatures
    
    
    65EX-21 SubsidiariesEX-23 Consent of KPMGEX-31.1 Section 302 Certification of Co-CEOEX-31.2 Section 302 Certification of Co-CEOEX-31.3 Section 302 Certification of CFOEX-32.1 Section 906 Certification of Co-CEOEX-32.2 Section 906 Certification of Co-CEOEX-32.3 Section 906 Certification of CFO
  2




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PART I.
 Statement Regarding Forward-Looking Disclosures
  Recent Developments  Agreement for Sale
      3




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Item 1. Business
 General
   th
  4




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Business Description
   
    
    Jewelry  Costume jewelry, earrings, and ear piercing services; and
    
    Accessories  Other fashion accessories, hair ornaments, handbags, and novelty items.
  Fiscal Year EndedFeb. 3, 2007
    
    
    Jan. 28, 2006
    
    
    Jan. 29, 2005Jewelry
    
    $
    855,926
    
    
    
    58.0
    %
    
    $
    795,377
    
    
    
    58.0
    %
    
    $
    717,406
    
    
    
    56.0
    %Accessories
    
    
    625,061
    
    
    
    42.0
    %
    
    
    574,375
    
    
    
    42.0
    %
    
    
    562,001
    
    
    
    44.0
    %$
    1,480,987
    
    
    
    100.0
    %
    
    $
    1,369,752
    
    
    
    100.0
    %
    
    $
    1,279,407
    
    
    
    100.0
    %
   Fiscal Year EndedFeb. 3,
    
    
    Jan. 28,
    
    
    Jan. 29,2007
    
    
    2006
    
    
    2005NET SALESNorth America
    
    $
    1,024,009
    
    
    $
    964,008
    
    
    $
    906,071International
    
    
    456,978
    
    
    
    405,744
    
    
    
    373,336Total revenues
    
    $
    1,480,987
    
    
    $
    1,369,752
    
    
    $
    1,279,407INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAXESNorth America
    
    $
    210,578
    
    
    $
    204,554
    
    
    $
    170,323International
    
    
    58,072
    
    
    
    55,117
    
    
    
    51,313Total income from
continuing operations
before income taxes
    
    $
    268,650
    
    
    $
    259,671
    
    
    $
    221,636LONG-LIVED ASSETSNorth America
    
    $
    181,756
    
    
    $
    159,361
    
    
    $
    145,418International
    
    
    83,569
    
    
    
    63,358
    
    
    
    59,108Total long-lived assets
    
    $
    265,325
    
    
    $
    222,719
    
    
    $
    204,526
 5




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Strategy
  Actively Manage Merchandise Trends and Display of Merchandise
 Provide Attentive Customer Service
 Store Growth Strategy
 Licensing Arrangements.
 Maintain Strong Supplier Relationships
 Capitalize on Our Brand Name.
 Stores
  6




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Purchasing and Distribution
    Store Management
  7




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Store Openings, Closings and Future Growth
     Brand Building
  Trademarks and Service Marks
  8




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Management Information Systems
  Competition
  Seasonality
  Employees
  
 Item 1A. Risk Factors
 Certain Risk Factors Relating to our Business.
  Fluctuations in consumer preference may adversely affect the demand of our products and result
in a decline in our sales.
  Our business is affected by consumer spending patterns
  9




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Advance purchases of our merchandise make us vulnerable to changes in consumer preferences and
pricing shifts and may negatively affect our results of operations.
  A disruption of imports from our foreign suppliers or significant fluctuation in the value of
the U.S. Dollar or foreign exchange rates may increase our costs and reduce our supply of
merchandise.
   Interruptions in distribution of our merchandise from our distribution facilities may
negatively affect our profitability.
  Store operations and expansion may affect our ability to increase Net sales and operate
profitably.
  10




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The failure to execute our international expansion or successfully integrate our international
operations may impede our strategy of increasing Net sales and adversely affect our operating
results.
   Natural disasters or unusually adverse weather conditions or potential emergence of disease or
pandemic could adversely affect our Net sales or supply of inventory.
  Information technology systems changes may disrupt our supply of merchandise
  11




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We are implementing certain other changes to our information technology systems that may
disrupt operations
  Fluctuations in same-store Net sales may affect the price of our stock.
  Changes in the anticipated seasonal business pattern could adversely affect our sales and
profits and our quarterly results may fluctuate due to a variety of factors.
  Our profitability could be adversely affected by high petroleum prices.
  12




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Our growth is dependent on successful execution of our business strategy.
  Our industry is highly competitive.
  A decline in number of people who go to malls could reduce the number of our customers and
reduce our Net sales.
  The possibility of war and acts of terrorism could disrupt the Companys information or
distribution systems and increase our costs of doing business.
  We depend on our key personnel.
  13




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Litigation matters incidental to our business could be adversely determined against us.
  We make estimates for our tax liabilities based on tax positions that could be challenged in
the future.
  The Companys cost of doing business could increase as a result of changes in federal, state or
local regulations.
  If our independent manufacturers or licensees or joint venture partners do not use ethical
business practices or comply with applicable laws and regulations, our brand name could be harmed
due to negative publicity and our results of operations could be adversely affected.
  We rely on third parties to distribute our merchandise and if these third parties do not
adequately perform this function, our business would be disrupted.
  We may be unable to protect our trademarks and other intellectual property rights.
  14




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The Company may be unable to rely on liability indemnities given by foreign vendors which could adversely affect our financial results.
  Certain Risks Relating to the Proposed Merger.
 Failure to Complete Merger.
  
    
    Managements attention from our day-to-day business may be diverted;
    
    We may lose key employees;
    
    Our relationships with vendors, landlords, and business partners may be disrupted as a
result of uncertainties with regard to our business and prospects;
    
    We will be required to pay significant transaction costs related to proposed merger, such as
legal, accounting, and other fees; and
    
    The market price of shares of our common stock may decline to the extent that the current
market price of those shares reflects a market assumption that the proposed merger will be
completed.
  Substantial Indebtedness
  
 Item 1B. Unresolved Staff Comments
  15




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Item 2. Properties
        
 Item 3. Legal Proceedings
  16




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Lustig v. Claires Stores, Inc., et
al.
 Henzel v.
Claires Stores, Inc., et al. McCormack v. Schaeffer, et al. Minissa v. Schaefer, et al. Benoit v. Schaefer, et al. Call4U v. Claires Stores,
Inc., et al. International Union of Operating Engineers
Pension Fund of Eastern Pennsylvania and Delaware v. Claires
Stores, Inc., et al. Lustig McCormack Call4U Call4U
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
  Closing Price of Common StockHigh
    
    LowYear Ended February 3, 2007First Quarter
    
    $
    36.31
    
    
    $
    30.30Second Quarter
    
    
    34.84
    
    
    
    24.04Third Quarter
    
    
    29.58
    
    
    
    24.88Fourth Quarter
    
    
    34.78
    
    
    
    27.29Year Ended January 28, 2006First Quarter
    
    $
    23.40
    
    
    $
    20.63Second Quarter
    
    
    25.41
    
    
    
    21.59Third Quarter
    
    
    26.27
    
    
    
    23.05Fourth Quarter
    
    
    31.12
    
    
    
    26.01
 17




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18




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Item 6. Selected Financial Data
  As of or for the Fiscal Year EndedFeb. 3,
    
    Jan. 28,
    
    Jan. 29,
    
    Jan. 31,
    
    Feb. 1,2007(1)
    
    2006
    
    2005
    
    2004
    
    2003(In thousands except per share amounts)Statement of Operations Data:Net sales
    
    $
    1,480,987
    
    
    $
    1,369,752
    
    
    $
    1,279,407
    
    
    $
    1,132,834
    
    
    $
    1,001,537Income from continuing operations
    
    
    188,762
    
    
    
    172,343
    
    
    
    146,259
    
    
    
    115,038
    
    
    
    77,979Net income
    
    
    188,762
    
    
    
    172,343
    
    
    
    143,124
    
    
    
    115,038
    
    
    
    77,744Income Per Share:Basic:From continuing operations
    
    $
    1.97
    
    
    $
    1.74
    
    
    $
    1.48
    
    
    $
    1.17
    
    
    $
    0.80Net income
    
    
    1.97
    
    
    
    1.74
    
    
    
    1.45
    
    
    
    1.17
    
    
    
    0.80Diluted:From continuing operations
    
    $
    1.96
    
    
    $
    1.73
    
    
    $
    1.47
    
    
    $
    1.17
    
    
    $
    0.80Net income
    
    
    1.96
    
    
    
    1.73
    
    
    
    1.44
    
    
    
    1.17
    
    
    
    0.80Cash Dividends Per Share:Common stock
    
    $
    0.40
    
    
    $
    0.65
    
    
    $
    0.30
    
    
    $
    0.14
    
    
    $
    0.08Class A common stock
    
    
    0.20
    
    
    
    0.325
    
    
    
    0.15
    
    
    
    0.07
    
    
    
    0.04Balance Sheet Data:Current assets
    
    $
    538,642
    
    
    $
    598,007
    
    
    $
    493,326
    
    
    $
    360,023
    
    
    $
    321,608Current liabilities
    
    
    195,451
    
    
    
    179,445
    
    
    
    166,938
    
    
    
    143,326
    
    
    
    141,010Working capital
    
    
    343,191
    
    
    
    418,562
    
    
    
    326,388
    
    
    
    216,697
    
    
    
    180,598Total assets
    
    
    1,091,266
    
    
    
    1,090,701
    
    
    
    966,129
    
    
    
    805,924
    
    
    
    738,129Long-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70,000Stockholders equity
    
    
    847,662
    
    
    
    868,318
    
    
    
    755,687
    
    
    
    632,450
    
    
    
    501,254
 
 (1)
    
    Consists of 53 weeks. 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
   19




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Overview
    
    
    maximizing the effectiveness of our retail product pricing through promotional activity
    
    minimizing our product costs through economies of scale as the worlds leading
mall-based retailer of value-priced accessories and jewelry
    
    reinvesting operating cash flows into opening new stores, remodeling existing stores,
and infrastructure in order to create future revenues and build brand name loyalty
  
    
    successfully identifying merchandise appealing to our customers and managing our
inventory levels
 20




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
    
    displaying our merchandise at convenient, accessible locations staffed with personnel
that provide courteous and professional customer service
    
    sourcing our merchandise to achieve a positive price/value relationship
    
    increasing sales at existing store locations
    
    expanding our sales, especially in our International division, through additional store locations
  Recent Developments  Agreement for Sale
      Critical Accounting Policies and Estimates
   21




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Inventory Valuation
  Valuation of Long-Lived Assets
   Goodwill Impairment
  Intangible Asset Impairment
  22




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Income Taxes
     Stock-Based Compensation
   23




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Results of Consolidated Operations
  Fiscal Year2007
    
    
    2006
    
    
    2005Net sales
    
    $
    1,480,987
    
    
    $
    1,369,752
    
    
    $
    1,279,407Increase in comparable store sales
    
    
    2.0
    %
    
    
    6.0
    %
    
    
    8.0
    %Gross profit percentage
    
    
    53.3
    %
    
    
    54.3
    %
    
    
    54.1
    %Selling, general and administrative expenses
As a percentage of Net sales
    
    
    32.6
    %
    
    
    32.8
    %
    
    
    33.7
    %Income from continuing operations
    
    $
    188,762
    
    
    $
    172,343
    
    
    $
    146,259Net income
    
    $
    188,762
    
    
    $
    172,343
    
    
    $
    143,124Income from continuing operations per diluted share
    
    $
    1.96
    
    
    $
    1.73
    
    
    $
    1.47Number of stores at the end of the period(1)
    
    
    2,992
    
    
    
    2,878
    
    
    
    2,836
 
 (1)
    
    Number of stores excludes Claires Nippon and stores operated under license agreements outside of
North America  24




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Fiscal Year EndedFeb. 3, 2007
    
    
    Jan. 28, 2006
    
    
    Jan. 29, 2005Jewelry
    
    
    58.0
    %
    
    
    58.0
    %
    
    
    56.0
    %Accessories
    
    
    42.0
    %
    
    
    42.0
    %
    
    
    44.0
    %100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    25




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Seasonality and Quarterly Results
  Impact of Inflation
  Segment Operations
  26




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North America
  Fiscal Year2007
    
    2006
    
    2005Net sales
    
    $
    1,024,009
    
    
    $
    964,008
    
    
    $
    906,071Increase in comparable store sales
    
    
    3.0
    %
    
    
    6.0
    %
    
    
    10.0
    %Gross profit percentage
    
    
    53.6
    %
    
    
    54.5
    %
    
    
    53.9
    %Number of stores at the end of the period(1)
    
    
    2,133
    
    
    
    2,106
    
    
    
    2,119
 
 (1)
    
    Number of stores excludes Claires Nippon and stores operated under license agreements outside of North
America      Fiscal Year EndedFeb. 3, 2007
    
    
    Jan. 28, 2006
    
    
    Jan. 29, 2005Jewelry
    
    
    62.0
    %
    
    
    64.0
    %
    
    
    63.0
    %Accessories
    
    
    38.0
    %
    
    
    36.0
    %
    
    
    37.0
    %100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 27




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International
  Fiscal Year2007
    
    2006
    
    2005Net sales
    
    $
    456,978
    
    
    $
    405,744
    
    
    $
    373,336Increase (decrease) in comparable store sales
    
    
    (1.0
    %)
    
    
    6.0
    %
    
    
    4.0
    %Gross profit percentage
    
    
    52.7
    %
    
    
    53.8
    %
    
    
    54.4
    %Number of stores at the end of the period(1)
    
    
    859
    
    
    
    772
    
    
    
    717
 
 (1)
    
    Number of stores excludes Claires Nippon stores and stores operated under license agreements      Fiscal Year EndedFeb. 3, 2007
    
    
    Jan. 28, 2006
    
    
    Jan. 29, 2005Jewelry
    
    
    48.0
    %
    
    
    45.0
    %
    
    
    40.0
    %Accessories
    
    
    52.0
    %
    
    
    55.0
    %
    
    
    60.0
    %100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 28




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Analysis of Consolidated Financial Condition
  Fiscal Year EndedFeb. 3, 2007
    
    Jan. 28, 2006
    
    Jan. 29, 2005Operating activities
    
    $
    232,250
    
    
    $
    242,358
    
    
    $
    197,091Investing activities
    
    
    (99,256
    )
    
    
    52,614
    
    
    
    (203,436
    )Financing activities
    
    
    (224,584
    )
    
    
    (58,000
    )
    
    
    (28,141
    )
     29




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Liquidity and Capital Resources
    Contractual Obligations and Off Balance Sheet Arrangements
  30




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Payments Due by PeriodContractual Obligations
    
    
    
    
    
    Less than 1
    
    
    
    
    
    
    
    
    
    
    More than(in millions)
    
    Total
    
    
    year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 yearsOperating leases for real estate
    
    $
    1,159.6
    
    
    $
    180.6
    
    
    $
    318.8
    
    
    $
    260.2
    
    
    $
    400.0Operating
leases for equipment,
leasehold improvements, and
equipment purchases
    
    
    9.2
    
    
    
    5.9
    
    
    
    3.0
    
    
    
    0.3
    
    
    
    Letters of credit
    
    
    4.3
    
    
    
    4.3
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    1,173.1
    
    
    $
    190.8
    
    
    $
    321.8
    
    
    $
    260.5
    
    
    $
    400.0
   Proposed Financing in Connection with the Merger
   Equity
Financing
     Debt
Financing
   
    
    the absence of a material adverse change at the Company;
    
    the execution of satisfactory definitive documentation;
    
    receipt of an amount equal to at least 20% of the pro forma total
consolidated capitalization of Bauble Parent (on the closing date of the merger) in
common and/or preferred equity from equity investors, including affiliates of Apollo;
    
    the absence of any amendments or waivers to the merger agreement to the
extent adverse to the lenders in any material respect which have not been approved by
the arrangers;
    
    the creation of perfected security interests;
    
    payment of fees and expenses;
    
    the absence of any default, event of default or material breach of certain
representation; and
    
    the receipt of specified financial statements of the Company.
   Senior
Secured Credit Facilities, Senior Unsecured Notes and Senior
Subordinated Notes
  Bridge
Facilities
    Recent Accounting Pronouncements
     31




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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
 Foreign Currency
    32




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Interest Rates
  
 Item 8. Financial Statements and Supplementary Data
 Page No.Reports of Independent Registered Public Accounting Firm
    
    
    34Consolidated Balance Sheets as of February 3, 2007 and January 28, 2006
    
    
    37Consolidated Statements of Operations and Comprehensive Income for the
fiscal years ended February 3, 2007, January 28, 2006, and January 29, 2005
    
    
    38Consolidated Statements of Changes in Stockholders Equity for the fiscal
years ended February 3, 2007, January 28, 2006, and January 29, 2005
    
    
    39Consolidated Statements of Cash Flows for the fiscal years ended
February 3, 2007, January 28, 2006, and January 29, 2005
    
    
    40Notes to Consolidated Financial Statements
    
    
    41
 33




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Report of Independent Registered Public Accounting Firm
 
    Share
Based Payment
 Internal Control  Integrated
Framework
 
 
 34




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Report of Independent Registered Public Accounting Firm
 
 Internal Control  Integrated Framework
    Internal Control  Integrated Framework Internal Control 
Integrated Framework
 35




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CLAIRES STORES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 Feb. 3,
    
    
    Jan. 28,2007
    
    
    2006(In thousands, except share and per share amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    340,877
    
    
    $
    431,122Inventories
    
    
    121,119
    
    
    
    113,405Prepaid expenses
    
    
    35,565
    
    
    
    17,738Other current assets
    
    
    41,081
    
    
    
    35,742Total current assets
    
    
    538,642
    
    
    
    598,007Property and equipment:Land and buildings
    
    
    17,350
    
    
    
    18,151Furniture, fixtures and equipment
    
    
    283,556
    
    
    
    252,346Leasehold improvements
    
    
    288,499
    
    
    
    238,817589,405
    
    
    
    509,314Less accumulated depreciation and amortization
    
    
    (324,080
    )
    
    
    (286,595
    )265,325
    
    
    
    222,719Intangible assets, net
    
    
    51,582
    
    
    
    45,427Other assets
    
    
    34,775
    
    
    
    25,910Goodwill
    
    
    200,942
    
    
    
    198,638287,299
    
    
    
    269,975Total assets
    
    $
    1,091,266
    
    
    $
    1,090,701LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Trade accounts payable
    
    $
    56,323
    
    
    $
    50,242Income taxes payable
    
    
    35,102
    
    
    
    36,708Accrued expenses and other liabilities
    
    
    104,026
    
    
    
    92,495Total current liabilities
    
    
    195,451
    
    
    
    179,445Deferred tax liability
    
    
    19,424
    
    
    
    20,979Deferred rent expense
    
    
    26,125
    
    
    
    21,959Other liabilities
    
    
    2,604
    
    
    
    48,153
    
    
    
    42,938Commitments and contingencies
    
    
    
    
    
    
    Stockholders equity:Preferred stock par value $1.00 per share;
authorized 1,000,000 shares, issued and
outstanding 0 shares
    
    
    
    
    
    
    Class A common stock par value $0.05 per share;
authorized 40,000,000 shares, issued and
outstanding 4,869,041 shares and 4,895,746
shares, respectively
    
    
    243
    
    
    
    245Common stock par value $0.05 per share;
authorized 300,000,000 shares, issued and
outstanding 88,202,733 shares and 94,580,977
shares, respectively
    
    
    4,410
    
    
    
    4,729Additional paid-in capital
    
    
    75,486
    
    
    
    60,631Accumulated other comprehensive income, net of tax
    
    
    33,956
    
    
    
    21,036Retained earnings
    
    
    733,567
    
    
    
    781,677847,662
    
    
    
    868,318Total liabilities and stockholders equity
    
    $
    1,091,266
    
    
    $
    1,090,701
  37




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##### Table of Contents



CLAIRES STORES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
 Fiscal Year EndedFeb. 3, 2007
    
    
    Jan. 28, 2006
    
    
    Jan. 29, 2005(In thousands, except per share amounts)Net sales
    
    $
    1,480,987
    
    
    $
    1,369,752
    
    
    $
    1,279,407Cost of sales, occupancy and buying expenses
    
    
    691,646
    
    
    
    625,866
    
    
    
    587,687Gross profit
    
    
    789,341
    
    
    
    743,886
    
    
    
    691,720Other expenses (income):Selling, general and administrative
    
    
    482,097
    
    
    
    449,555
    
    
    
    431,060Depreciation and amortization
    
    
    56,771
    
    
    
    48,900
    
    
    
    44,882Interest and other income
    
    
    (18,177
    )
    
    
    (14,240
    )
    
    
    (5,858
    )520,691
    
    
    
    484,215
    
    
    
    470,084Income from continuing operations before income taxes
    
    
    268,650
    
    
    
    259,671
    
    
    
    221,636Income taxes
    
    
    79,888
    
    
    
    87,328
    
    
    
    75,377Income from continuing operations
    
    
    188,762
    
    
    
    172,343
    
    
    
    146,259Discontinued operation (Note 4):Loss on disposal of Lux Corp., net of income taxes
of $0, $0 and $1,865, respectively
    
    
    
    
    
    
    
    
    
    
    (3,135
    )Net loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (3,135
    )Net income
    
    
    188,762
    
    
    
    172,343
    
    
    
    143,124Foreign currency translation adjustments
    
    
    12,920
    
    
    
    (7,005
    )
    
    
    7,932Comprehensive income
    
    $
    201,682
    
    
    $
    165,338
    
    
    $
    151,056Net income per share:Basic:Income from continuing operations
    
    $
    1.97
    
    
    $
    1.74
    
    
    $
    1.48Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (0.03
    )Net income per share
    
    $
    1.97
    
    
    $
    1.74
    
    
    $
    1.45Diluted:Income from continuing operations
    
    $
    1.96
    
    
    $
    1.73
    
    
    $
    1.47Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (0.03
    )Net income per share
    
    $
    1.96
    
    
    $
    1.73
    
    
    $
    1.44Basic weighted average number of common shares
outstanding
    
    
    95,959
    
    
    
    99,106
    
    
    
    98,937Diluted weighted average number of common and common
equivalent shares outstanding
    
    
    96,231
    
    
    
    99,522
    
    
    
    99,310Dividends declared per share:Common stock
    
    $
    0.40
    
    
    $
    0.65
    
    
    $
    0.30Class A common stock
    
    $
    0.20
    
    
    $
    0.325
    
    
    $
    0.15
  38




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##### Table of Contents



CLAIRES STORES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
  Number of
    
    
    
    
    
    
    Number of
    
    
    
    
    
    
    
    
    
    
    Accumulatedshares of Class
    
    
    Class A
    
    
    shares of
    
    
    
    
    
    
    Additional
    
    
    otherA common
    
    
    common
    
    
    common
    
    
    Common
    
    
    paid-in
    
    
    comprehensive
    
    
    Retainedstock
    
    
    stock
    
    
    stock
    
    
    stock
    
    
    capital
    
    
    income, net
    
    
    earnings
    
    
    TotalBalance: January 31, 2004
    
    
    5,222
    
    
    $
    261
    
    
    
    93,693
    
    
    $
    4,685
    
    
    $
    49,392
    
    
    $
    20,109
    
    
    $
    558,003
    
    
    $
    632,450Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    143,124
    
    
    
    143,124Class A common stock converted to Common stock
    
    
    (97
    )
    
    
    (5
    )
    
    
    97
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock options exercised, including tax benefit
    
    
    
    
    
    
    
    
    
    
    68
    
    
    
    3
    
    
    
    1,085
    
    
    
    
    
    
    
    
    
    
    
    1,088Cash dividends ($0.30 per Common share and
$0.15 per Class A common share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28,907
    )
    
    
    (28,907
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,932
    
    
    
    
    
    
    
    7,932Balance: January 29, 2005
    
    
    5,125
    
    
    
    256
    
    
    
    93,858
    
    
    
    4,693
    
    
    
    50,477
    
    
    
    28,041
    
    
    
    672,220
    
    
    
    755,687Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    172,343
    
    
    
    172,343Class A common stock converted to common stock
    
    
    (229
    )
    
    
    (11
    )
    
    
    229
    
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cash dividends ($0.65 per common share and
$0.325 per Class A common share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (62,886
    )
    
    
    (62,886
    )Stock options exercised, including tax benefit
    
    
    
    
    
    
    
    
    
    
    323
    
    
    
    17
    
    
    
    5,727
    
    
    
    
    
    
    
    
    
    
    
    5,744Acceleration of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    314
    
    
    
    
    
    
    
    
    
    
    
    314Restricted stock, net of unearned compensation
    
    
    
    
    
    
    
    
    
    
    171
    
    
    
    8
    
    
    
    1,122
    
    
    
    
    
    
    
    
    
    
    
    1,130Long-term incentive plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,991
    
    
    
    
    
    
    
    
    
    
    
    2,991Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,005
    )
    
    
    
    
    
    
    (7,005
    )Balance: January 28, 2006
    
    
    4,896
    
    
    
    245
    
    
    
    94,581
    
    
    
    4,729
    
    
    
    60,631
    
    
    
    21,036
    
    
    
    781,677
    
    
    
    868,318Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    188,762
    
    
    
    188,762Class A common stock converted to common stock
    
    
    (27
    )
    
    
    (2
    )
    
    
    27
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cash dividends ($0.40 per common share and
$0.20 per Class A common share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (37,553
    )
    
    
    (37,553
    )Stock options exercised, including tax benefit
    
    
    
    
    
    
    
    
    
    
    619
    
    
    
    31
    
    
    
    12,618
    
    
    
    
    
    
    
    
    
    
    
    12,649Stock repurchased
    
    
    
    
    
    
    
    
    
    
    (7,097
    )
    
    
    (356
    )
    
    
    
    
    
    
    
    
    
    
    (199,319
    )
    
    
    (199,675
    )Restricted stock, net of unearned compensation
    
    
    
    
    
    
    
    
    
    
    19
    
    
    
    1
    
    
    
    1,287
    
    
    
    
    
    
    
    
    
    
    
    1,288Long-term incentive plan
    
    
    
    
    
    
    
    
    
    
    54
    
    
    
    3
    
    
    
    950
    
    
    
    
    
    
    
    
    
    
    
    953Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,920
    
    
    
    
    
    
    
    12,920Balance: February 3, 2007
    
    
    4,869
    
    
    $
    243
    
    
    
    88,203
    
    
    $
    4,410
    
    
    $
    75,486
    
    
    $
    33,956
    
    
    $
    733,567
    
    
    $
    847,662
  39




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##### Table of Contents



CLAIRES STORES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Fiscal Year EndedFeb. 3, 2007
    
    
    Jan. 28, 2006
    
    
    Jan. 29, 2005(In thousands)Cash flows from operating activities:Net income
    
    $
    188,762
    
    
    $
    172,343
    
    
    $
    143,124Adjustments to reconcile net income to net cash
provided by operating activities:Loss on disposal of discontinued operations, net of tax benefit
    
    
    
    
    
    
    
    
    
    
    3,135Depreciation and amortization
    
    
    56,771
    
    
    
    48,900
    
    
    
    44,882Amortization of intangible assets
    
    
    1,489
    
    
    
    1,232
    
    
    
    1,129Loss on retirement of property and equipment
    
    
    2,361
    
    
    
    3,460
    
    
    
    3,253(Gain) loss on sale of intangible assets
    
    
    5
    
    
    
    
    
    
    
    (170
    )Excess tax benefit from stock-based compensation
    
    
    (3,648
    )
    
    
    857
    
    
    
    323Stock compensation expense
    
    
    7,080
    
    
    
    4,121
    
    
    
    Acceleration of stock options
    
    
    
    
    
    
    314
    
    
    
    (Increase)
decrease in -Inventories
    
    
    (5,105
    )
    
    
    (4,995
    )
    
    
    (15,959
    )Prepaid expenses
    
    
    (16,441
    )
    
    
    8,637
    
    
    
    (534
    )Other assets
    
    
    (10,725
    )
    
    
    (6,143
    )
    
    
    (6,495
    )Increase
(decrease) in -Trade accounts payable
    
    
    3,444
    
    
    
    9,747
    
    
    
    3,585Income taxes payable
    
    
    2,184
    
    
    
    5,776
    
    
    
    3,657Accrued expenses and other liabilities
    
    
    6,853
    
    
    
    (309
    )
    
    
    11,629Deferred income taxes
    
    
    (4,558
    )
    
    
    (4,458
    )
    
    
    4,502Deferred rent expense
    
    
    3,778
    
    
    
    2,876
    
    
    
    1,030Net cash provided by operating activities
    
    
    232,250
    
    
    
    242,358
    
    
    
    197,091Cash flows from investing activities:Acquisition of property and equipment
    
    
    (95,192
    )
    
    
    (73,444
    )
    
    
    (63,634
    )Proceeds from sale of land and buildings
    
    
    881
    
    
    
    
    
    
    
    Acquisition of intangible assets
    
    
    (4,945
    )
    
    
    (8,555
    )
    
    
    (5,189
    )Purchase of short-term investments
    
    
    
    
    
    
    (82,334
    )
    
    
    (246,234
    )Sale of short-term investments
    
    
    
    
    
    
    216,947
    
    
    
    111,621Net cash provided by (used in) investing activities
    
    
    (99,256
    )
    
    
    52,614
    
    
    
    (203,436
    )Cash flows from financing activities:Proceeds from stock options exercised
    
    
    8,996
    
    
    
    4,886
    
    
    
    766Purchase and retirement of common stock
    
    
    (199,675
    )
    
    
    
    
    
    
    Excess tax benefit from stock-based compensation
    
    
    3,648
    
    
    
    
    
    
    
    Dividends paid
    
    
    (37,553
    )
    
    
    (62,886
    )
    
    
    (28,907
    )Net cash used in financing activities
    
    
    (224,584
    )
    
    
    (58,000
    )
    
    
    (28,141
    )Effect of foreign currency exchange rate changes on cash
and cash equivalents
    
    
    1,345
    
    
    
    3,144
    
    
    
    862Net increase (decrease) in cash and cash equivalents
    
    
    (90,245
    )
    
    
    240,116
    
    
    
    (33,624
    )Cash and cash equivalents at beginning of period
    
    
    431,122
    
    
    
    191,006
    
    
    
    224,630Cash and cash equivalents at end of period
    
    $
    340,877
    
    
    $
    431,122
    
    
    $
    191,006
  40




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##### Table of Contents



CLAIRES STORES, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Nature of Operations
 Principles of Consolidation
 Reclassifications
 Use of Estimates
 Fiscal Year
 Cash and Cash Equivalents
  Short-term Investments
  41




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##### Table of Contents



Inventories
 Prepaid
Expenses
 Feb. 3,
    
    
    Jan. 28,2007
    
    
    2006Prepaid rent and occupancy
    
    $
    30,078
    
    
    $
    13,510Prepaid insurance
    
    
    3,134
    
    
    
    2,714Other
    
    
    2,353
    
    
    
    1,514$
    35,565
    
    
    $
    17,738
 Other Current Assets
 Feb. 3,
    
    
    Jan. 28,2007
    
    
    2006Deferred tax asset
    
    $
    15,059
    
    
    $
    13,071Credit card and other receivables
    
    
    10,369
    
    
    
    10,325Trust assets relating to our deferred compensation plan
    
    
    9,317
    
    
    
    7,066Store supplies
    
    
    6,166
    
    
    
    5,110Other
    
    
    170
    
    
    
    170$
    41,081
    
    
    $
    35,742
 Property and Equipment
 Impairment
of Long-Lived Assets
 Goodwill
 42




---



##### Table of Contents



Other
Assets
  Intangible
Assets
 Feb. 3, 2007
    
    
    Jan. 28, 2006Gross
    
    
    Accumulated
    
    
    Gross
    
    
    AccumulatedCarrying Amount
    
    
    Amortization
    
    
    Carrying Amount
    
    
    AmortizationAmortizable intangibles
    
    $
    57,659
    
    
    $
    7,176
    
    
    $
    51,037
    
    
    $
    6,696Non-amortizable intangibles
    
    
    1,099
    
    
    
    
    
    
    
    1,086
    
    
    
    $
    58,758
    
    
    $
    7,176
    
    
    $
    52,123
    
    
    $
    6,696
  43




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##### Table of Contents



Weighted Average AmortizationPeriod for AmortizableIntangible Asset Acquisitions
    
    Non-Amortizable
    
    Amortizable
    
    Intangible Asset AcquisitionsFiscal Year EndedFebruary 3, 2007
    
    $
    
    
    
    $
    4,945
    
    
    
    12.2January 28, 2006
    
    $
    
    
    
    $
    8,555
    
    
    
    8.9January 29, 2005
    
    $
    
    
    
    $
    5,189
    
    
    
    9.6
  Accrued Expenses and Other Liabilities
 Feb. 3,
    
    
    Jan. 28,2007
    
    
    2006Compensation and benefits
    
    $
    50,672
    
    
    $
    46,152Sales and local taxes
    
    
    13,002
    
    
    
    13,445Gift cards and certificates
    
    
    15,411
    
    
    
    12,645Store rent
    
    
    6,161
    
    
    
    5,410Other
    
    
    18,780
    
    
    
    14,843$
    104,026
    
    
    $
    92,495
 Revenue Recognition
 Cost of Sales
 Gift
Cards and Gift Certificates
 Leasing
 44




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##### Table of Contents



Basic
and Diluted Shares
  Fiscal Year EndedFeb. 3,
    
    
    Jan. 28,
    
    
    Jan. 29,2007
    
    
    2006
    
    
    2005Numerator:Income from continuing operations
    
    $
    188,762
    
    
    $
    172,343
    
    
    $
    146,259Denominator:Weighted average number of shares outstandingBasic
    
    
    95,959
    
    
    
    99,106
    
    
    
    98,937Effect of dilutive stock options
    
    
    212
    
    
    
    370
    
    
    
    373Effect of dilutive time-vested and long-term incentive stock awards
    
    
    60
    
    
    
    46
    
    
    
    Diluted
    
    
    96,231
    
    
    
    99,522
    
    
    
    99,310Income from continuing operations per share:Basic
    
    $
    1.97
    
    
    $
    1.74
    
    
    $
    1.48Diluted
    
    $
    1.96
    
    
    $
    1.73
    
    
    $
    1.47
  Income Taxes
 Foreign Currency Translation
 Fair Value of Financial Instruments
 45




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##### Table of Contents



Derivative Instruments and Hedging Activities
   Stock-Based Compensation
     Fiscal Year EndedJan. 28,
    
    
    Jan. 29,2006
    
    
    2005Net income  as reported
    
    $
    172,343
    
    
    $
    143,124Stock-based employee compensation
expense determined under the fair
value based methods, net of income tax
    
    
    (6,734
    )
    
    
    (1,944
    )Stock-based employee compensation
expense included in reported
net income, net of income tax
    
    
    2,945
    
    
    
    Net income  pro forma
    
    $
    168,554
    
    
    $
    141,180Basic net income per share  as reported
    
    $
    1.74
    
    
    $
    1.45Basic net income per share  pro forma
    
    $
    1.70
    
    
    $
    1.43Diluted net income per share  as reported
    
    $
    1.73
    
    
    $
    1.44Diluted net income per share  pro forma
    
    $
    1.69
    
    
    $
    1.42
   46




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##### Table of Contents



Recent
Accounting Pronouncements
     47




---



##### Table of Contents



2. STATEMENTS OF CASH FLOWS
   3. CREDIT FACILITIES
   4. COMMITMENTS AND CONTINGENCIES
 Leasing
 Fiscal 2007
    
    
    Fiscal 2006
    
    
    Fiscal 2005Minimum store rentals
    
    $
    178,591
    
    
    $
    162,066
    
    
    $
    154,994Store rentals based on Net sales
    
    
    4,421
    
    
    
    4,734
    
    
    
    4,700Other rental expense
    
    
    12,051
    
    
    
    14,141
    
    
    
    17,796Total rental expense from
continuing operations
    
    $
    195,063
    
    
    $
    180,941
    
    
    $
    177,490
 48




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##### Table of Contents



2008
    
    $
    184,0062009
    
    
    168,4022010
    
    
    153,4642011
    
    
    138,2452012
    
    
    122,209Thereafter
    
    
    400,016$
    1,166,342
    Foreign Currency Options
  Legal
  49




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##### Table of Contents



Other
   5. STOCKHOLDERS EQUITY
 Stock Split
 Preferred Stock
 Class A Common Stock
 Rights to Purchase Series A Junior Participating Preferred Stock
 Stock Repurchase Program
 50




---



##### Table of Contents



6. STOCK OPTIONS AND STOCK-BASED COMPENSATION
        51




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##### Table of Contents



Fiscal Year Ended February 3, 2007WeightedWeighted
    
    AverageAverage
    
    RemainingNumber of
    
    Exercise
    
    Contractual Life
    
    AggregateShares
    
    Price
    
    (Years)
    
    Intrinsic ValueOutstanding at beginning of period
    
    
    1,113,436
    
    
    $
    15.33Options granted
    
    
    
    
    
    
    Options exercised
    
    
    (619,436
    )
    
    $
    14.53Options canceled
    
    
    (10,000
    )
    
    $
    16.93Outstanding at end of period
    
    
    484,000
    
    
    $
    16.31
    
    
    
    6.02
    
    
    $
    8,797,540Exercisable at end of period
    
    
    484,000
    
    
    $
    16.31
    
    
    
    6.02
    
    
    $
    8,797,540
 52




---



##### Table of Contents



Fiscal Year EndedJanuary 28, 2006
    
    January 29, 2005Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    AverageNumber of
    
    Exercise
    
    Number of
    
    ExerciseShares
    
    Price
    
    Shares
    
    PriceOutstanding at beginning of period
    
    
    1,511,813
    
    
    $
    15.40
    
    
    
    1,266,868
    
    
    $
    14.23Options granted
    
    
    
    
    
    
    
    
    
    
    350,000
    
    
    $
    19.01Options exercised
    
    
    (323,127
    )
    
    $
    15.09
    
    
    
    (68,555
    )
    
    $
    11.16Options canceled
    
    
    (75,250
    )
    
    $
    17.30
    
    
    
    (36,500
    )
    
    $
    15.96Outstanding at end of period
    
    
    1,113,436
    
    
    $
    15.33
    
    
    
    1,511,813
    
    
    $
    15.40Exercisable at end of period
    
    
    1,108,436
    
    
    $
    15.32
    
    
    
    428,842
    
    
    $
    12.39Weighted average fair value of options
granted during the period
    
    
    
    
    
    
    N/A
    
    
    
    
    
    
    $
    10.19
  Fiscal2005Expected dividend yield
    
    
    1.30
    %Expected stock price volatility
    
    
    50.00
    %Risk-Free interest rate
    
    
    4.60
    %Expected life of options
    
    7 years
   Options Outstanding and ExercisableWeightedAverageRemaining
    
    WeightedNumber of
    
    Contractual
    
    AverageShares
    
    Life
    
    ExerciseExercise Prices
    
    Outstanding
    
    (Years)
    
    Price$10.19
    
    
    100,000
    
    
    
    2.86
    
    
    $
    10.19$13.40
    
    
    25,000
    
    
    
    6.39
    
    
    $
    13.40$16.93
    
    
    134,000
    
    
    
    6.61
    
    
    $
    16.93$18.61
    
    
    200,000
    
    
    
    7.00
    
    
    $
    18.61$22.04
    
    
    25,000
    
    
    
    7.38
    
    
    $
    22.04484,000
    
    
    
    6.02
    
    
    $
    16.31
 Time-Vested Stock Awards
 53




---



##### Table of Contents



Weighted-AverageTime-Vested Shares
    
    Shares
    
    
    Grant Date Fair ValueNonvested at beginning of period
    
    
    169,933
    
    
    $
    22.48Granted
    
    
    18,400
    
    
    $
    24.38Vested
    
    
    (94,933
    )
    
    $
    22.70Forfeited
    
    
    
    
    
    
    Nonvested at end of period
    
    
    93,400
    
    
    $
    22.64
 Long-Term Incentive Stock Plans
  54




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##### Table of Contents



7. EMPLOYEE BENEFIT PLANS
   8. INCOME TAXES
  Fiscal Year EndedFeb. 3,
    
    
    Jan. 28,
    
    
    Jan. 29,2007
    
    
    2006
    
    
    2005Domestic
    
    $
    198,603
    
    
    $
    186,904
    
    
    $
    155,497Foreign
    
    
    70,047
    
    
    
    72,767
    
    
    
    66,139$
    268,650
    
    
    $
    259,671
    
    
    $
    221,636
 55




---



##### Table of Contents



Fiscal Year EndedFeb. 3,
    
    
    Jan. 28,
    
    
    Jan. 29,2007
    
    
    2006
    
    
    2005Federal:Current
    
    $
    64,044
    
    
    $
    71,693
    
    
    $
    55,299Deferred
    
    
    (3,169
    )
    
    
    (3,315
    )
    
    
    3,55760,875
    
    
    
    68,378
    
    
    
    58,856State:Current
    
    
    5,978
    
    
    
    6,028
    
    
    
    4,679Deferred
    
    
    (508
    )
    
    
    (343
    )
    
    
    3695,470
    
    
    
    5,685
    
    
    
    5,048Foreign:Current
    
    
    14,333
    
    
    
    14,247
    
    
    
    10,836Deferred
    
    
    (790
    )
    
    
    (982
    )
    
    
    63713,543
    
    
    
    13,265
    
    
    
    11,473Total income tax expense from
continuing operations
    
    
    79,888
    
    
    
    87,328
    
    
    
    75,377Tax benefit of discontinued operations
    
    
    
    
    
    
    
    
    
    
    (1,865
    )Total income tax expense
    
    $
    79,888
    
    
    $
    87,328
    
    
    $
    73,512
  Feb. 3,
    
    
    Jan. 28,2007
    
    
    2006Deferred tax assets:Accrued expenses
    
    $
    5,947
    
    
    $
    5,050Deferred rent
    
    
    4,901
    
    
    
    4,408Depreciation
    
    
    1,153
    
    
    
    Discontinued operations
    
    
    
    
    
    
    224Compensation & benefits
    
    
    7,903
    
    
    
    5,575Inventory
    
    
    1,201
    
    
    
    1,714Gift cards
    
    
    1,529
    
    
    
    1,089Net operating loss carry forwards
    
    
    7,029
    
    
    
    8,418Other
    
    
    944
    
    
    
    840Total gross deferred tax assets
    
    
    30,607
    
    
    
    27,318Valuation allowance
    
    
    (5,607
    )
    
    
    (8,305
    )Total deferred tax assets, net
    
    
    25,000
    
    
    
    19,013Deferred tax liabilities:Depreciation
    
    
    
    
    
    
    3,230Operating leases
    
    
    
    
    
    
    230Intangible asset amortization
    
    
    26,694
    
    
    
    22,151Other
    
    
    1,245
    
    
    
    809Total deferred tax liabilities
    
    
    27,939
    
    
    
    26,420Net deferred tax liability
    
    $
    (2,939
    )
    
    $
    (7,407
    )
 56




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##### Table of Contents



Fiscal Year EndedFeb. 3,
    
    Jan. 28,
    
    Jan. 29,2007
    
    2006
    
    2005U.S. income taxes at statutory federal rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %Foreign income tax benefit at less than U.S. rate
    
    
    (6.8
    )
    
    
    (6.4
    )
    
    
    (6.0
    )State and local income taxes, net of federal tax benefit
    
    
    1.7
    
    
    
    1.4
    
    
    
    1.7American Jobs Creation Act repatriation
    
    
    
    
    
    
    2.2
    
    
    
    Change in accrual for estimated tax contingencies
    
    
    (3.0
    )
    
    
    2.3
    
    
    
    1.9Other, net
    
    
    2.8
    
    
    
    (0.9
    )
    
    
    1.429.7
    %
    
    
    33.6
    %
    
    
    34.0
    %
       57




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##### Table of Contents



9. RELATED PARTY TRANSACTIONS
    10. SELECTED QUARTERLY FINANCIAL DATA
  Fiscal Year Ended February 3, 20071st Qtr
    
    
    2nd Qtr
    
    
    3rd Qtr
    
    
    4th Qtr
    
    
    Year(In thousands, except per share amounts)Net sales
    
    $
    311,927
    
    
    $
    349,160
    
    
    $
    347,593
    
    
    $
    472,307
    
    
    $
    1,480,987Gross profit
    
    
    164,753
    
    
    
    181,281
    
    
    
    182,106
    
    
    
    261,201
    
    
    
    789,341Net income
    
    
    29,701
    
    
    
    35,962
    
    
    
    36,627
    
    
    
    86,472
    
    
    
    188,762Basic net income per shareNet income
    
    $
    0.30
    
    
    $
    0.37
    
    
    $
    0.39
    
    
    $
    0.93
    
    
    $
    1.97Diluted net income per shareNet income
    
    $
    0.30
    
    
    $
    0.37
    
    
    $
    0.39
    
    
    $
    0.93
    
    
    $
    1.96
 58




---



##### Table of Contents



Fiscal Year Ended January 28, 20061st Qtr
    
    
    2nd Qtr
    
    
    3rd Qtr
    
    
    4th Qtr
    
    
    Year(In thousands, except per share amounts)Net sales
    
    $
    302,708
    
    
    $
    325,042
    
    
    $
    327,259
    
    
    $
    414,743
    
    
    $
    1,369,752Gross profit
    
    
    164,013
    
    
    
    173,194
    
    
    
    175,718
    
    
    
    230,961
    
    
    
    743,886Net income
    
    
    29,702
    
    
    
    35,458
    
    
    
    38,127
    
    
    
    69,056
    
    
    
    172,343Basic net income per shareNet income
    
    $
    0.30
    
    
    $
    0.36
    
    
    $
    0.38
    
    
    $
    0.70
    
    
    $
    1.74Diluted net income per shareNet income
    
    $
    0.30
    
    
    $
    0.36
    
    
    $
    0.38
    
    
    $
    0.69
    
    
    $
    1.73
 11. SEGMENT REPORTING
  59




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##### Table of Contents



Fiscal Year2007
    
    
    2006
    
    
    2005Net sales:North America
    
    $
    1,024,009
    
    
    $
    964,008
    
    
    $
    906,071International
    
    
    456,978
    
    
    
    405,744
    
    
    
    373,336Total Net sales
    
    $
    1,480,987
    
    
    $
    1,369,752
    
    
    $
    1,279,407Operating income:North America
    
    $
    233,540
    
    
    $
    226,269
    
    
    $
    195,518International
    
    
    73,704
    
    
    
    68,062
    
    
    
    65,142Total operating income
    
    $
    307,244
    
    
    $
    294,331
    
    
    $
    260,660Depreciation and amortization:North America
    
    $
    37,252
    
    
    $
    32,383
    
    
    $
    29,046International
    
    
    19,519
    
    
    
    16,517
    
    
    
    15,836Total depreciation and amortization
    
    $
    56,771
    
    
    $
    48,900
    
    
    $
    44,882Interest and other income:North America
    
    $
    (14,291
    )
    
    $
    (10,669
    )
    
    $
    (3,851
    )International
    
    
    (3,886
    )
    
    
    (3,571
    )
    
    
    (2,007
    )Total interest and other income
    
    $
    (18,177
    )
    
    $
    (14,240
    )
    
    $
    (5,858
    )Income from continuing operations before income taxes:North America
    
    $
    210,578
    
    
    $
    204,554
    
    
    $
    170,323International
    
    
    58,072
    
    
    
    55,117
    
    
    
    51,313Total income from continuing operations before income taxes
    
    $
    268,650
    
    
    $
    259,671
    
    
    $
    221,636Income taxes:North America
    
    $
    70,207
    
    
    $
    81,794
    
    
    $
    68,484International
    
    
    9,681
    
    
    
    5,534
    
    
    
    6,893Total income taxes
    
    $
    79,888
    
    
    $
    87,328
    
    
    $
    75,377Income from continuing operations:North America
    
    $
    140,372
    
    
    $
    122,760
    
    
    $
    101,839International
    
    
    48,390
    
    
    
    49,583
    
    
    
    44,420Total income from continuing operations
    
    $
    188,762
    
    
    $
    172,343
    
    
    $
    146,259Goodwill:North America
    
    $
    170,650
    
    
    $
    170,650
    
    
    $
    170,650International
    
    
    30,292
    
    
    
    27,988
    
    
    
    30,417Total goodwill
    
    $
    200,942
    
    
    $
    198,638
    
    
    $
    201,067Long lived assets:North America
    
    $
    181,756
    
    
    $
    159,361
    
    
    $
    145,418International
    
    
    83,569
    
    
    
    63,358
    
    
    
    59,108Total long lived assets
    
    $
    265,325
    
    
    $
    222,719
    
    
    $
    204,526Total assets:North America
    
    $
    746,805
    
    
    $
    822,687
    
    
    $
    668,772International
    
    
    344,461
    
    
    
    268,014
    
    
    
    297,357Total assets
    
    $
    1,091,266
    
    
    $
    1,090,701
    
    
    $
    966,129Capital ExpendituresNorth America
    
    $
    62,557
    
    
    $
    46,895
    
    
    $
    46,930International
    
    
    32,635
    
    
    
    26,549
    
    
    
    16,704Total capital expenditures
    
    $
    95,192
    
    
    $
    73,444
    
    
    $
    63,634
 60




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##### Table of Contents



12. SUBSEQUENT EVENT
  
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
    Internal Control  Integrated Framework Internal Control  Integrated Framework
   61




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##### Table of Contents



Item 9B. Other Information
  
 PART III.
 
 Items 10, 11, 12, 13 and 14. Directors and Executive Officers of the Registrant; Executive
Compensation; Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters; Certain Relationships and Related Transactions; and Principal Accountant Fees
and Services.
  
 PART IV.
 
 Item 15. Exhibits, Financial Statement Schedules
  1.
    
    Financial Statements
 Page No.Reports of Independent Registered Public Accounting Firm
    
    
    34Consolidated Balance Sheets as of February 3, 2007 and January 28, 2006
    
    
    37Consolidated
Statements of Operations and Comprehensive Income for the fiscal years ended February 3, 2007, January 28, 2006,
and January 29, 2005
    
    
    38Consolidated
Statements of Changes in Stockholders Equity for the fiscal years ended February 3, 2007, January 28, 2006,
and January 29, 2005
    
    
    39Consolidated
Statements of Cash Flows for the fiscal years ended February 3, 2007, January 28, 2006, and January 29, 2005
    
    
    40Notes to Consolidated Financial Statements
    
    
    41
 2.
    
    Financial Statement Schedules
  3.
    
    Exhibits
 (2
    )(a)
    
    Agreement and Plan of Merger dated March 20, 2007 between Bauble Holdings,
Corp., a Delaware corporation, Bauble Acquisition Sub, Inc., a Florida
corporation and a direct wholly-owned subsidiary of Parent and Claires Stores,
Inc., a Florida corporation (incorporated by reference to Exhibit 2.1 to the
Companys Current Report on Form 8-K dated March 22, 2007).(3
    )(a)
    
    Amended and Restated Articles of Incorporation of Claires Stores, Inc.
(formerly known as CSI Florida Acquisition, Inc.) (incorporated by reference to
Exhibit 3.1 to the Companys Current Report on Form 8-K dated June 30, 2000).
 62




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##### Table of Contents



(3
    )(b)
    
    Articles of Amendment to the Amended and Restated Articles of Incorporation
of Claires Stores, Inc. (incorporated by reference to Exhibit 3(c) to the
Companys Annual Report on Form 10-K filed on April 15, 2004).(3
    )(c)
    
    Amended and Restated Bylaws of Claires Stores, Inc. (incorporated by
reference to Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q filed
on December 6, 2006).(4
    )(a)
    
    Rights Agreement, effective May 30, 2003 between Claires Stores, Inc. and
Wachovia Bank, N.A., as Rights Agent, together with the following exhibits
thereto: Exhibit A  Form of Articles of Amendment Designating the Series A
Junior Participating Preferred Stock of Claires Stores, Inc.; Exhibit B 
Form of Right Certificate; Exhibit C  Summary of Rights to Purchase Shares of
Preferred Shares of Claires Stores, Inc. (incorporated by reference to Exhibit
4.1 to the Companys Registration Statement on Form 8-A filed on June 23,
2003).(4
    )(b)
    
    First Amendment to Rights Agreement dated as of March 20, 2007 to the Rights
Agreement, dated May 30, 2003 by and between Claires Stores, Inc. and American
Stock Transfer and Trust Company, as successor to Wachovia Bank, N.A., as
Rights Agent (incorporated by reference to Exhibit 4.1 to the Companys Current
Report on Form 8-K dated March 22, 2006).(4
    )(c)
    
    Shareholder Agreement dated as of March 20, 2007, among Bauble Holdings,
Corp., a Delaware corporation, Bauble Acquisition Sub, Inc., a Florida
corporation and a direct wholly-owned subsidiary of Parent, and each of the
other
parties signatory hereto (incorporated by reference to Exhibit 2.1 to
the Companys Current Report on Form 8-K dated March 22, 2007).(10
    )(a)
    
    Amended and Restated 1996 Incentive Compensation Plan of the Company
(incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on
Form 10-Q filed on June 8, 2005 relating to the 2003 Annual Meeting of
Stockholders).(10
    )(b)
    
    401(k) Profit Sharing Plan, as amended (incorporated by reference to Exhibit
10(e) to the Companys Annual Report on Form 10-K for the fiscal year ended
February 1, 1992).(10
    )(c)
    
    2005 Management Deferred Compensation Plan effective as of February 4, 2005
(incorporated by reference to Exhibit 10.2 to the Companys Quarterly Report on
Form 10-Q filed on June 8, 2005).(10
    )(d)
    
    Amended and Restated Office Lease dated January 1, 2004 between the Company
and Rowland Schaefer Associates (incorporated by reference to Exhibit 10(x) to
the Companys Annual Report on Form 10-K filed on April 15, 2004).(10
    )(e)
    
    Retirement Agreement dated December 2003 between Claires Stores, Inc. and
Rowland Schaefer (incorporated by reference to Exhibit 10(y) to the Companys
Annual Report on Form 10-K filed on April 15, 2004).
 63




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##### Table of Contents



(10
    )(f)
    
    Loan and Security Agreement dated March 31, 2004 by and among, the Company,
as lead borrower for BMS Distributing Corp., Claires Boutiques, Inc., CBI
Distributing Corp., and Claires Puerto Rico Corp., Fleet Retail Group, Inc.,
as administrative agent for and the revolving credit lenders and other
financial institutions or entities from time to time parties thereto, and Fleet
National Bank as issuer (incorporated by reference to Exhibit 10(z) to the
Companys Annual Report on Form 10-K filed on April 15, 2004).(10
    )(g)
    
    2005 Incentive Compensation Plan (incorporated by reference to Exhibit 10
(c) to the Companys Annual Report on Form 10-K filed on April 13, 2005).(10
    )(h)
    
    Amended and Restated Employment Agreement dated January 18, 2007 between
Claires Stores, Inc., a Florida corporation and Bonnie Schaefer (incorporated
by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K dated
January 19, 2007).(10
    )(i)
    
    Amended and Restated Employment Agreement dated January 18, 2007 between
Claires Stores, Inc., a Florida corporation and Marla Schaefer (incorporated
by reference to Exhibit 10.3 to the Companys Current Report on Form 8-K dated
January 19, 2007).(10
    )(j)
    
    Employment Agreement dated January 18, 2007 between Claires Stores, Inc., a
Florida corporation and Ira Kaplan (incorporated by reference to Exhibit 10.1
to the Companys Current Report on Form 8-K dated January 19, 2007).(21
    )
    
    Subsidiaries of the Company.(1)(23
    )
    
    Consent of KPMG LLP.(1)(24
    )
    
    Power of Attorney (included on signature page).Each management contract or compensatory plan or arrangement to be
filed as an exhibit to this report pursuant to Item 14(c) is listed in
exhibit nos. (10)(a), (10)(b), (10)(c), (10)(e), (10)(g), (10)(h),
(10)(i) and (10)(j).(31.1
    )
    
    Certification of Co-Chief Executive Officerpursuant to Rules
13a-14(a) and 15d-14(a).(1)(31.2
    )
    
    Certification of Co-Chief Executive Officer pursuant to Rules 13a-14(a) and
15d-14(a).(1)(31.3
    )
    
    Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and
15d-14(a).(1)(32.1
    )
    
    Certification of Co-Chief Executive Officer pursuant to 18 USC Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.(2)(32.2
    )
    
    Certification of Co-Chief Executive Officer pursuant to 18 USC Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.(2)(32.3
    )
    
    Certification of Chief Financial Officer pursuant to 18 USC Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.(2)
 
 (1) Filed herewith.(2) Furnished herewith. 64




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##### Table of Contents



SIGNATURES
  CLAIRES STORES, INC.April 19, 2007
    By:

/s/ Marla L. SchaeferMarla L. Schaefer, Co-Chief Executive Officer April 19, 2007
    By:

/s/ E. Bonnie SchaeferE. Bonnie Schaefer, Co-Chief Executive Officer April 19, 2007
    By:
    /s/ Ira D. KaplanIra D. Kaplan, Senior Vice President and ChiefFinancial Officer POWER OF ATTORNEY
   April
19, 2007
    
    /s/ Marla L. SchaeferMarla L. Schaefer, Co-Chairman of the Board of
Directors (principal co-executive officer and
director)April
19, 2007
    
    /s/ E. Bonnie SchaeferE. Bonnie Schaefer, Co-Chairman of the Board of
Directors (principal co-executive officer and
director)April 19, 2007
    
    /s/ Ira D. KaplanIra D. Kaplan, Senior Vice President, Chief
Financial Officer and Director (principal
financial and accounting officer and director)April
19, 2007
    
    /s/ Martha Clark GossMartha Clark Goss, DirectorApril
19, 2007
    
    /s/ Ann Spector LieffAnn Spector Lieff, DirectorApril
19, 2007
    
    /s/ Bruce G. MillerBruce G. Miller, DirectorApril
19, 2007
    
    /s/ Steven H. TishmanSteven H. Tishman, Director
 65




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##### Table of Contents



INDEX TO EXHIBITS
 EXHIBIT NO.
    
    DESCRIPTION21
    
    Subsidiaries of the Company.23
    
    Consent of KPMG LLP.31.1
    
    Certification of Co-Chief Executive Officer pursuant to Rule 13a-14(a) and
15d-14(a).31.2
    
    Certification of Co-Chief Executive Officer pursuant to Rule 13a-14(a) and
15d-14(a).31.3
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and
15d-14(a).32.1
    
    Certification of Co-Chief Executive Officer pursuant to 18 USC Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Co-Chief Executive Officer pursuant to 18 USC Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.3
    
    Certification of Chief Financial Officer pursuant to 18 USC Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 66